Introduction to economics and business
Overview
Principles: 1,2,3,4.5,4.7
The Economy: 1.2, 1.6-1.8, 1.11, 3.3, 6.1-6.2, 7.6, 8.1-8.2, 8.4-8.7,
D&S: 1,2,4,5,6,8,9,10,11,12
1) Introduction
- Principles: 1
- The Economy: 3.3 & 7.6
2) Trade & Exchange
- Principles: 2
- The Economy: 1.6-1.8
3) Markets
- Principles: 3, 4.5, 4.7
- The Economy: 8.1-8.2 & 8.4-8.7
4) The firm & global economy (not in the exam)
- The Economy: 1.2, 1.11, 6.1 & 6.2
5) Markets & information
- D&S: 1, 2, 4
6) Game theory
- D&S: 4, 5
7) Transaction costs economics
- D&S: 9
8) Agency theory and corporate governance
- D&S: 8 + extra literature on BS
9) Behavioral theory of the firm
- D&S: 5,6
10) Competitive & corporate strategy
- D&S: 10,11
11) Mergers & acquisitions and FDI
- Literature on BS
12) Hybrid forms & evolutionary approaches to organizations
- D&S: 12 + literature on BS
,Lecture 1: Introduction
Principles: 1
The Economy: 3.3 & 7.6
Macroeconomics: studies how the aggregate economy behaves with reference to inflation,
price levels, rate of growth, national income, unemployment and more
Microeconomics: focuses on individual decisions
Economics all (economics) interaction between individuals, organizations and
governments
- Economics is a subject area and a way of viewing the world
How humans make decisions in the face of scarcity
Scarcity: human wants for goods, services and resources exceed what is available
limited supply (NL: schaarste)
- When this interaction increases in volume economic growth
Economic growth because of productivity growth
productivity growth because of capitalism
- Private property
- Firms & markets
- Technology, specialization & efficiency
Often a conflict between efficiency and inequality
The economy is the sum of all individual choices of people and organizations
Governments use laws, rules and incentives to influence economic interaction
How do we make these choices?
in tradition economics ‘rational’ and ‘maximizing/optimizing’ behavior is assumed
nowadays lot of attention for ‘bounded rationality’ and ‘cognitive biases’
Bounded rationality = we want to make smart choices, but we are just not smart enough
Cognitive biases = thinking mistakes
The economic problem
The economic problem = how to make the best use of the available resources
- What and how much has to be produced?
- How should this be produced?
- Who will receive the produced goods and services?
Resources: Land, labor, capital & entrepreneurship
Reward: rent, wages, interest & profit
Division of labor = the splitting of composite tasks into their component parts and having
these performed separately
- Leads to productivity increases increasing wealth of nations
,Our “wants” are unlimited, our resources are not scarcity
Opportunity costs every choice you make comes with a cost
- Scarcity choices (tradeoffs) opportunity costs
- No such thing as a free lunch (even though the lunch is free, you could have been
doing something else instead of eating the free lunch)
- What would you be doing if you weren’t here right now? second choice
The “net value” of that second choice are your opportunity costs
Net value = “value” of alternative – costs of alternative
Opportunity costs (should) affect behavior:
- What is the influence of your salary on attending lectures?
- The line in a supermarket taking free time away
- “for that price, I can make it myself” weird to say since you have opportunity costs
Bread in supermarket = 2,50 make it yourself will take a few hours in which you could
have earned a lot more money than 2,50
Time = money
Take into account explicit and implicit costs = opportunity costs
For every choice:
- Value of that choice (utility/happiness/profit) how to measure
- Explicit costs of that choice what does it cost?
A clear direct payment of cash (whether actual cash or from debit)
- Implicit costs of that choice what do I give up? opportunity costs
The value – the explicit costs of the second choice
The benefit of the next best option
Economic costs of a choice explicit costs & implicit costs
which choice to make?
- Choice which has higher “value” than economic costs
- Economic rent: difference between “value” and “economic costs”
You receive an economic rent from taking an action when it results in a benefit
greater than its economic cost
Example Adele & Rihanna
- Free ticket for Adele you are willing to pay 60,-
- Ticket for Rihanna = 60,- willing to pay 80,-
Adele: explicit costs are 0, value is 60,-, opportunity costs is 20,- for Rihanna
Economic rent = 60 – 20 = 40
Rihanna: explicit costs are 60,- value is 80,-, opportunity costs is 60 for Adele
Economic rent = 20 – 60 = -40
You should go to Adele
_____________________________________________________________________
If you could sell your ticket from Adele for 50,- (not selling is the same as buying)
Going to Adele: Value of 60 – explicit costs of 50 – opportunity costs of 20 = -10
Going to Rihanna: Value of 80 – explicit costs of 60 – opportunity costs of 10 = 10
You should go to Rihanna
, What is the real price of buying a product?
The alternative product you cannot buy
- If a firm can make 100 TV’s or 70 laptops in one hour
Price laptop = 10/7 TV
Price TV = 7/10 laptop
Sunk costs
- Sunk costs costs that cannot be recovered
- Sunk costs fallacy (wrongly) taking sunk costs into account in decision making
- Sunk costs affect our emotions, we experience them as losses
Marginal analyses
= The process of breaking down a decision into a series of ‘yes or no’ decisions An
examination of the additional benefits of an activity compared to the additional costs
incurred by that same activity
- With opportunity costs we see which choice we should make between two
alternatives
- Another choice we have to make: how much of something should we produce, buy or
spend our time on?
“Rational” and “optimizing” behavior
- Which choice yields the highest outcome?
What is the most efficient choice? Which quantity yields the highest profit,
happiness, utility?
Marginal returns/benefits what is the return/benefit of one extra unit?
Marginal costs what are the costs of one extra unit?
Most efficient point: marginal returns = marginal costs
Net benefit = how much happiness have gained? add up benefits and subtract costs
= difference between the marginal benefits and marginal costs of an action
- When the total benefits rise more than the total costs the action is logical
- When the total costs rise more than the total benefits the action is illogical
As long as the marginal benefit is positive we should increase our activity
Capitalism market economy
- Resources are privately owned
- The economic problem is “solved” using markets and prices
- Society determines through demand what is produced and how this is produced
individual decision of people and organizations
- All these actors should take their opportunity costs into account and use marginal
analysis to decide what and how much to produce/buy
